Cyclical Behavior of prices in the G7 Countries Through Wavelets Analysis

The analysis in the paper, conducted using the GDP and the GDP deflator time series (OECD source; 1960-2001) for the G7 Countries, shows the robustness of the negative covariance between the GDP and its deflator, but only at long-run horizons. Through the wavelet decomposition we evaluate the price-output relationship at different time scales, where most countries reveal similar patterns. More precisely, at short-time scales a positive correlation seems to appear whereas and, consequently, a regime switching at a time horizon of about two years leading to a negative relationship for higher horizons. These results seem to suggest that the negative or acyclical relationship usually found after the sixties may be the composite effect of different time scale correlations, where the four years horizon component seems to have the greatest influence. In particular for CAN, FRA, and ITA Countries we observe something like a rotation of the price output relationship from counter-cyclical to pro-cyclical. Finally, the analysis show that even the relationship between the two series seem to be not very stable regarding also the lead and lag structure. The phase is non-linear for all countries and, consequently, the group delay (the lag) is not constant. In particular, looking at the D3 time scale we observe an inversion of the local monotonicity at about frequency 0.3-0.35 for all G7 countries.